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Features : New Avenues For Growth

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Facing increasing competition, banks within the Nordic region are looking to new products and new markets to maintain growth.

The Nordic banking market is on a roll. With strong and stable economies across the board and solid growth figures for a number of years, it seems a good time to be in the Nordic region. However, with many markets reaching saturation in terms of organic growth, it is incumbent upon players in the Nordic region to find new ways to maintain that growth. Many are looking to offer new products and services, build market share in existing product lines or look outside the region for growth opportunities.

Competition is a key driver of change for banks within the region, as Lars Nordström, president and group CEO of Nordea, explains. “The healthy macroeconomic environment has led to increased competition, where margins, especially on corporate lending, have been squeezed. However, volume growth has more than compensated for this,” he says.

The numerous US and European banks that have entered the market over the past 10 or 15 years are also taking market share and increasing the competitive landscape for banking in the region. Deutsche Bank, for example, has been a presence in the region for almost 10 years.

Jan Olsson, head of Deutsche Bank corporate finance for the Nordic region and head of Deutsche Bank Sweden, says that this is a very important region for Deutsche Bank. “It was a strategic decision that we want to focus on this region, particularly on the corporate finance side—M&A; advisory and strategic financing,” he says. “We are also increasingly focusing on the private banking side, and sales and trading.”

In order to compete, banks must provide better service and best-practice solutions to their clients. “The need for high-quality advice, convenient services and concepts and 24/7 availability has grown rapidly as has the competition to attract talented employees,” says Nordström. Indeed, with a number of countries at all-time lows for unemployment, finding and retaining high-quality staff can be a challenge. The tightest labor markets are in Denmark and Norway. Klas Eklund, chief economist at SEB, says: “In Norway the labor market is showing signs of being overstretched, and they are partly dependent on importing labor from other parts of Europe. But the central bank is regarding it with some anxiety and sending signals that they may raise rates to cool the labor market.”

In the past few years Swedish job growth has been strong, and employment rates are growing briskly, says Eklund. “The Swedish labor market is clearly not as stretched as Denmark or Norway because Sweden started with much greater capacity. In addition, they have promised reforms, which should give a boost to labor supply without creating bottlenecks in the labor market.”

Finland, however, is a different story. The country saw 20% unemployment in the early 1990s, although the level has fallen significantly and is now on par with the rest of Europe. However, this still makes it the highest in the Nordic region.
Competition, both for business and for staff, is clearly a driving force across the region. Some banks may look to new avenues to maintain the strong growth figures seen over the past few years. Growth is a very important issue for Nordic banks, notes Magnus Carlsson, CEO of merchant banking for SEB. “The economies are strong in the countries where we operate, stronger than in other parts of the world,” he says. “Nordic banks need to take advantage of that to find ways to grow outside their traditional markets.”

Regulations and Consolidation
Aside from tough competition, there are a number of other issues facing banks within the region. First and foremost is regulatory change. As is the case across Europe, and indeed globally, major new regulatory developments, such as Basel II, are a prime concern. In addition, the diverse markets within the Nordic region supply their own regulatory issues.
Larger regulatory developments could affect the ability of many smaller institutions to stay afloat in the competitive Nordic markets. Indeed, Janne Thomsen, analyst at Moody’s Investors Service, notes that the three key drivers for consolidation among the smaller banks may be declining asset quality, increasing resource requirements that are needed for the preparation of Basel II, and the move toward new accounting standards: “All of these could have negative implications for profitability and underlying financial performance.”

Nordström: Margins
are shrinking

In the past few years there has been little in the way of consolidation in the region, but that could be changing. “We would expect to see some more consolidation transactions in the market over the coming years,” says Olsson. “In order to maintain growth, Nordic banks have two possibilities: inward mergers to cut costs and outward expansion to gain more clients, especially to Russia and Eastern Europe.”

However some market players feel that it could be difficult for some smaller banks to merge. Says Carlsson: “There are not too many plays left, and in some instances there are big issues that would make such plays quite difficult. I am not waiting for big M&A; to happen here. I think that we are looking more at pan-Nordic-Baltic growth. Many Nordic banks are trying to provide a total pan-Nordic-Baltic solution to clients.”

SEB, for example, has long looked outside its home market for growth. The group bought German bank BfG Bank in 2000. “Since then we have focused on growing in markets outside Sweden,” says Carlsson. SEB moved eastward as well, buying three Baltic banks that are now well placed within their respective countries.

Nordea, by contrast, is focusing more on new product development and cross-selling of products. “Our main strategy is to increase business with existing customers in all segments,” Nordström says. Nordea is working to enhance its position within long-term savings and investment products. The bank also wants to broaden services delivered to corporate customers and leverage relationships to increase its presence in the capital markets.

Individual Markets
Each banking market in the region has its own distinct characteristics. Icelandic banks, for example, recently underwent a renaissance in terms of growth, for the first time being seen as a major force within the region. Norway has also seen strong returns in the banking market over the past few years. This was primarily due to good lending growth, which mitigated margin pressure coming from intense competition among domestic and regional banks. Banks such as DnB and Nordea Bank Norge lead the market.

Finland has a highly competitive banking market despite the low penetration of foreign banks. Banks follow similar strategies focusing mainly on retail customers, and such strong competition is likely to continue.

Swedish banks also face strong competition from domestic, regional and international players. Thomsen at Moody’s says, however, that Swedish banks have strong domestic franchises, strong focus on retail lending, limited risk appetite and good financial fundamentals. In addition, many larger Swedish banks have strong international franchises.

The Danish banking market is dominated by Danske Bank, Nordea Bank Danmark, Jyske Bank and Sydbank. “So far, only Danske Bank has established a meaningful franchise outside Denmark, focusing on Scandinavia, the UK and Ireland,” says Thomsen. Denmark also has a highly successful mortgage banking market, with much of the market now financed via covered bonds. Although most banks have solid financial fundamentals, according to Thomsen, they also face margin pressure as a result of strong competition.